Breaking the Rules
Stockscores.com Perspectives for the week ending February 20, 2005
In this week's issue:
Over the last 15 years of trading I have developed a set of rules that I use to trade by. These rules are based on a lot of trial and error and painful losses, but through the process of creating the rules I now have a set of criteria to identify and execute trading opportunities. And they work pretty well.
I have put those rules in to the books and CD ROMs that make up the StockSchool Pro course, and teach these rules in class room sessions to investors and traders a few times a year. I am an expert on the rules, I know them better than I know anything else. I have tested them over and over, and believe that my rules are very effective when followed. I can teach anyone the rules in a relatively short time. And yet, I find myself breaking my own rules from time to time.
After traveling across Canada over the last month teaching others some of these rules, I returned to full time trading this week. In my first couple of days of trading, I found myself breaking my own rules too often, and almost every time I did, I lost money. It highlighted the importance of the rules, but also made me ask myself why I would break the rules that I know too well.
I decided to create a list of reasons why I break my rules as a way to help other investors and traders recognize some of the barriers to stock market profitability. Here they are:
Reason Number 1 - Enthusiasm
I love to trade the stock market. It is exhilarating to outsmart the crowd and take a profit from a stock trade with a few simple clicks of the mouse. The money is nice, but nicer is the win, the feeling of having beat the other traders who are trying to take my money. Too much enthusiasm causes me to take trades that are not great in the hope that I can lock in that good feeling of making a good trade. It causes me to lower my standards simply for the love of the trade. To be successful, I must channel my enthusiasm in to wanting to be right, rather than wanting to make a trade.
Reason Number 2 - Lack of Focus
Trading stocks is a waiting game. You can not create opportunities in the market by working harder, but instead, you have to wait for the market to tell you what to do. However, you also have to be listening to the market closely, even when it seems that there is nothing going on. I missed a number of great trades this week by taking my eye off of the market. Answering email, watching a hockey press conference and talking to my daughter about her pink bracelet were all distractions that caused me to miss good trades. Even if the market seems boring, don't get sidetracked. Stay focused and constantly look for opportunities.
Reason Number 3 - Focusing on the Wrong Goal
We all want to make money in the market, but focusing on the desire to make a profit causes us to look for reasons to enter a trade, instead of focusing on reasons not to enter a trade. If your goal is to be right, you will look for the criteria that make a trade not worth considering. Every time you look at a trade, ask yourself if all the criteria for this trade to be the right trade are met. Make a check list if you have to so you can ensure that you are taking a trade because it is the right thing to do. If one of the rules is not met, don't take the trade. I had numerous trades last week where all but one of my rules was satisfied and I decided to take the trade. Most of these trades, where one rule was broken, ended up as losers.
Reason Number 4 - Trying to Make Up for Past Losses
If I have a few losses in a row, I start to lower my standards because I want to end the negative emotions of losing. I am eager to find a trade that will make me money, and I find I am willing to bend the rules so that I can take a trade now and get on the road to recovery. This loss of patience is costly.
Reason Number 5 - Rear View Mirror Trading
It is painful to miss a good trade. When you see a stock that met all of the rules and gave those who took advantage of the rules a great profit, it hurts. It makes me want to play that stock again because there is a good feeling association with that stock. As a result, by focusing on the past, I perceived market activity differently and again lost sight of the rules. It is essential to not have any emotion affecting decision making, and considering what happened before can bring an emotional attachment to the stock.
By Wednesday, I was following my rules better, although I still had a couple of let downs late in the trading day. However, by following the rules, the money flowed in. Any time I broke my rules, the money flowed out. The market does not let you get away with much right now, because we don't have a strong trend. It is essential to have a set of rules that work, understand what they are, and follow them to the letter. If not, you are likely to fail.
Trading and investing in the stock market is simple, but not easy. Making money buying and selling stocks is hard because we are emotional, and emotions cause us to do foolish things. I am most successful when I follow my rules exactly, too bad I had to have a few bad days to remind me of that.Back To Top
Stocks go up in price because investors are willing to pay more. Investors tend to buy companies that they are optimistic about, so it is important to measure whether investors are generally optimistic or pessimistic about a company. Stock charts can provide many clues about the mood of the market. For example, rising bottoms on a stock chart indicate greater enthusiasm among buyers than sellers.
The Sentiment Stockscore considers these kinds of chart pattern factors, and provides an indication of whether investors are showing optimism or pessimism. I have found that stocks that have a Sentiment Stockscore moving through 60 and rising tend to continue to rise as investor optimism carries them along.
The Sentiment Crossover Market Scan seeks stocks that have their Sentiment Stockscore crossing in to the 60 and greater zone after a lengthy period below 60. If this occurs, and the stock does not have significant overhead resistance, then there is a good potential for a future uptrend. By limiting downside potential with a stop loss point just below a short term support price, investors can better manage risk while leaving the potential for price gains.
This strategy is good for identifying longer term trades that do not require constant monitoring. The criteria are relatively simple, and a regular check of positions for an exit signal may only take a few minutes.
I ran this Market Scan on stocks trading at least 300 times a day and below $10, and found a couple of stocks that look to have good potential to turn around after lengthy periods of weakness.Back To Top
1. ACTU
ACTU is starting to show optimism with rising bottoms on its stock charts. It still needs to break through resistance at $2.70, and it may be better to wait for that to happen before considering the stock, but I think it well worth watching for some strength in the next little while.
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2. T.BBD.SV.B
T.BBD.SV.B looks to have broken its longterm downtrend and is now forming a rising bottom consolidation that seems to signal a reversal of the longterm pessimism that has held the stock. I would like to see it break through resistance at $2.75 as a sign that the stock is likely to start moving higher, keep an eye on it.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
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contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
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